Thursday, September 06, 2007

Eddie Hobbs & Brendan Investments

Eddie Hobbs has already had wide media coverage for his new property investment vehicle, Brendan Investments Pan European Property PLC and he’ll be a guest on the Late Late Show tomorrow to put the icing on his PR cake.

The aim of the Company is to raise €50m in capital and borrow a further €150m to create a property investment portfolio worth €200m. The prospectus says that “the company will work with current and future bank lenders to secure bank finance AT A MINIMUM LEVEL OF 75% of the value of the property.”

Page 12 of the prospectus covers the fees payable by investors:

The fees will be as follows:= No entry fees.= 1% of the gross asset value of the company is payable to Brendan Investments Property Management Limited for the management of the property and development portfolio.

Assuming that the company succeeds in raising €50m and investing it with 75% gearing, the gross asset value of the company would be €200m. At this level the 1% fee payable to the management company would be €2m annually.

The prospectus advises that the expected life of the company is 7-10 years, at the end of which period the assets will be liquidated and distributed to the company.This suggests that, even if there is no capital appreciation from the property assets purchased, the management company will receive €14m-20m in fees. If the value of the underlying assets increase, the annual fee will also increase pro-rata.

Assuming the company makes only the initial call on investors, one would assume that they will try to invest the funds raised fairly quickly, within the first 12-18 months? Some development projects may take longer but the company strategy is to invest 75% of funds in existing rent-producing commercial properties.

An annual fee of €2m may be reasonable in the initial couple of years when management activity will be at its maximum, but in the later years of the scheme, when little new investment is being undertaken, it seems like a tidy little earner for the promoters.

An annual charge 1% of Gross Assets, rather than 1% of the investors capital, is a way of disguising the real annual 4% charge being levied by promoters. This approach is not unique to Brendan Investments.